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Executives

Mike Sund - VP, IR

David Schramm - President and CEO

Kevin Royal - CFO

Analysts

Philip Shen - Roth Capital

Chris Godby - Stephens, Inc.

Michael Lew - Needham

Ahmar Zaman - Piper Jaffray

Ben Callow - Robert W. Baird

Colin Rusch - Thinkequity

Craig Irwin - Wedbush Securities

Jed Dorsheimer - Canaccord

Jeremy Hellman - Divine Capital Partners

Maxwell Technologies (MXWL) Q1 2012 Earnings Call April 26, 2012 5:00 PM ET

Operator

Good day, and welcome to Maxwell Technologies’ first quarter financial results conference call. [Operator instructions.] It is now my pleasure to turn the conference over to Mr. Mike Sund. Please go ahead.

Mike Sund

Good afternoon. In a few moments, you will hear from David Schramm, Maxwell's president and CEO, and Kevin Royal, our chief financial officer.

First, we need to advise you that the following discussion will include forward-looking statements that are based on our current expectations and assumptions, which are subject to numerous risks and uncertainties and changes in circumstances and assumptions. Forward-looking statements in the following discussion do not purport to be predictions of future events or circumstances and may not be realized. For further information regarding risks and uncertainties, please refer to the MD&A and Risk Factors sections of our SEC filings, including our most recent Form 10-Q and our annual report on Form 10-K.

Electronic copies of these filings may be accessed by visiting the Investors section of our website, or via the SEC's website. Hard copies may be obtained by contacting the company. We encourage all investors to read these reports and our other SEC filings.

Some of you are listening via the internet and an archived replay of the call will be available online at our website. All information in today's call is as of April 26, 2012. The company undertakes no duty to update our forward-looking statements to conform the statements to actual results or changes in the company's expectations.

I should also mention the company’s annual meeting of stockholders will be conducted here in San Diego on May 9, and we look forward to seeing some of you there.

It’s now my pleasure to introduce Maxwell's President and CEO, David Schramm.

David Schramm

Thank you Mike, and good afternoon. I’ve been travelling in the last few weeks, and I’ve developed some hoarseness, so please bear with me as we report our Q1 2012 results.

Maxwell recorded total revenue of $39.2 million for the first quarter ended March 31, 2012. Now, that’s up 11% from the same period a year ago. That growth was driven not only by ultracapacitor sales of $22 million, which is up 3% from Q1 ’11, but also by unusually strong sales of microelectronics and high-voltage capacitor products, which came in at $17.2 million, which is up 24% from last year’s first quarter.

This growth, along with continuing cost and efficiency improvements, enabled the company to show a net profit of about $500,000 for the quarter. On a non-GAAP basis, net profit for Q1 was $1.8 million.

Now, this was the eight consecutive quarter that Maxwell has been profitable on a non-GAAP basis. Kevin’s going to provide some more financial details on this in a few minutes. As noted in our press release, ultracapacitor sales were lower sequentially compared with the fourth quarter. This was mainly due to normal seasonal factors including the Chinese New Year observance, which effectively shuts down business across much of Asia for two to three weeks every year.

Looking at key ultracapacitor markets, wind turbine deployments in China and elsewhere continue to be well below levels seen in previous years, so wind-related ultracapacitor sales were lower than a year ago. However, our sales in the hybrid bus drive systems in China continue to be steady, and contributions from a stop-start idle elimination system for autos in Europe and various backup power applications enabled us to sustain our year over year growth.

Looking ahead, an increase in recent order activity and intelligence from various sources in China, including forecasts from several of our customers, indicate that wind farm installations, both on and off shore, can be expected to move toward a more normal level over the next few quarters.

The current lull was predicted last year by the consulting firm that we engaged last year to assess business conditions and the direction of government policy in China, particularly as they related to the wind and the bus markets. China’s new five-year plan includes targets for increasing wind farm installations to help to satisfy the country’s ever-growing appetite for electrical energy and Chinese wind turbine OEMs are now marketing their systems globally, so we’ve got good reason to anticipate an upturn.

Energy storage systems for recuperative breaking and torque assist in fuel efficient, low emission hybrid electric transit buses for China continued to be the single largest ultracapacitor sales driver in Q1.

Last fall we announced a new supply agreement with Yutong, China’s largest bus producer, and we continue to supply ultracapacitor products to several other bus OEMs and hybrid drive system integrators. There are more than 5,000 hybrid buses powered by Maxwell ultracapacitors in daily service around the world, and their performance continues to validate the performance, quality, and the value proposition of our products.

According to our consultants, all of the 25 Chinese cities that are eligible for government subsidies for purchases of hybrid and electric transit vehicles are running behind their new energy vehicle deployment schedules. So bus OEMs and drive system integrators continue to gear up to deliver more hybrid vehicles.

In Europe, where reducing CO2 emissions is the focus of regulatory policy, hybrid bus, electric rail, and other heavy vehicle OEMs and drive train integrators continue to incorporate Maxwell ultracapacitors in their designs. But procurements that require government funding have slowed, as a result of economic difficulties in several European countries.

As we announced in January, Bombardier Transportation, a leading producer of rail vehicles and rail transportation equipment, systems, and services, has designed Maxwell ultracapacitors into its energy store braking energy recuperation system. These are stationary energy storage units that capture and store energy that otherwise would be wasted in the conventional friction-based braking system.

A network of these units can enable rail system operators to reduce grid power consumption by 20-30%. They also serve as a backup energy source to provide enough power to get trains to the next station in the event of a power outage. Bombardier and other rail vehicle OEMs also produce on-vehicle systems that use ultracapacitors for energy storage, so we’re hoping to have some more good news on electric rail design-ins.

Our automotive program with Continental AG for PSA’s Peugeot and Citroen diesel cars in Europe is now in its second year of series production. However, as has been reported elsewhere, car sales in Europe are lagging, so we’re seeing a bit of a slowdown. The good news is that PSA’s micro hybrid stop-start idle elimination and voltage stabilization system, which is now in more than 300,000 cars, has been rated superior to the battery-based systems being sold by other auto makers.

As we have discussed previously, the European Union’s stringent CO2 emission reduction standards will require increasing deployment of this and other hybridization technologies going forward. All hybrid cars incorporate a stop-start idle elimination function that turns off the internal combustion engine as the car slows and then restarts the engine when the driver releases the brake.

Batteries have been the incumbent energy source for stop-start, but constant restarting and stop and go traffic wears out batteries quickly. Heavy cycling and cold weather also affect batteries’ ability to recover fast enough to provide power for repetitive restarting, so stop-start systems constantly monitor the battery to determine if it has sufficient power for the next restart. If not, the system disables itself until the battery recharges from the alternator, so no fuel is saved and no emission reductions are achieved until the battery recovers.

PSA’s ultracap-powered stop-start system restarts every time in all conditions in about 400 milliseconds and reliably reduces fuel consumption and emissions by up to 15% in urban driving. The current European emissions standard equates to about 42 miles per gallon for gasoline-powered cars, so U.S. automakers are anticipating competitive pressure from more efficient imports.

They’ve also been announcing their own stop-start launch plans. Maxwell and Continental continue to call on the Detroit automakers, explaining and demonstrating how ultracapacitors make micro hybrid cars more reliable, more fuel-efficient, and more environmentally friendly.

With more than 16 million new cars being produced by automakers around the world each year, any amount of ultracapacitor content per car, multiplied by any reasonable fraction of the vehicles produced, would create a very sizable market opportunity in the years ahead.

We have development activity underway with several automakers and tier one suppliers. The success of the PSA program has validated our products and is stimulating interest and generating requests for price quotes, but it’s a slow process and the industry is secretive, so we still can’t predict when another designed-in announcement might come.

Also impacting our revenue is the delayed timing of programs in our new market sales efforts due to the general economic state of the European Union and the rest of the world. That said, a number of other applications have begun driving volumes that have helped us to maintain steady ultracapacitor sales growth, despite the global economic situation.

These include millions of postage stamp-sized PC-10 cells that go into data storage devices called solid state disk drives, or SSDs, for enterprise computing installations such as data centers. The ultracapacitors are mounted right on the circuit board, where they stand ready to provide a few seconds of instantly available backup power to allow work in process to be stored in the event of a power interruption.

PC-10s also provide power for wireless transmitters that allow smart utility meters to transmit data and to be read remotely. Last year, we launched an ultracapacitor module designed specifically to handle brief power disturbances and provide short term bridge power to the primary backup power source within an integrated, uninterruptible power supply system.

This UPS module has been designed into systems going into several new installations that will make [audio drops out for 9 seconds] …thousand units of another new product, an engine start module that acts as an onboard jump start power source for hard to start diesel trucks. Field trials with several fleet operators have gone very well, and we recently announced a distribution agreement with Pana-Pacific which specializes in truck products and has relationships with more than 2,000 truck dealers, OEMs, and OE part distribution centers in the U.S., Canada, and Mexico.

This module is the exact size and shape of the Group 31 batteries that heavy trucks carry, so it’s an easy to install, drop in replacement for one of the truck’s existing batteries. It addresses a growing problem with truck starting failures [audio drops out for 18 seconds] … as a standard option for new trucks.

Engine starting is also an issue for delivery vans, military vehicles, boats, backup power generators, construction, and mining equipment. So we’re in the process of developing variants of this initial product to address what we think can become a very significant global market.

As we expand our presence in the wind [audio drops out for 5 seconds] … some competition. In addition to established competitors in Asia and Europe, we began hearing ambitious claims from some newer startups. None of those competitors, old or new, has shown it can match Maxwell’s product quality, delivery, performance, and value proposition.

Some stronger competition actually would be good for the market. So far, Maxwell has been doing virtually all of the market development and our competitors just follow us around instead of identifying and serving new applications.

In a few minutes, I’ll discuss recent developments in our other two product lines, and comment on future prospects. But first I’d like our CFO, Kevin Royal, to provide some additional detail on the first quarter financial results. Kevin?

Kevin Royal

Thank you David. I’m going to spend a few minutes providing some additional information on our first quarter 2012 financial results.

Our revenues were $39.2 million for the first quarter of 2012, down 8% from Q4 2011. The ultracapacitor product line sales declined by 16%, compared with Q4 2011. The Chinese New Year holiday and overall historical seasonal softness typically impact our top line results in the first quarter of each year. In addition, we experienced some minor slowing in Europe during the quarter, and we have received feedback from European customers that the slowing may continue for the foreseeable future.

As a result, we have modified our revenue expectations for the full year to a range of 15-20% overall revenue growth for 2012. While our ultracapacitor product sales were down, our microelectronics product sales grew by 21% compared with Q4 2011, and revenues from our high voltage products remain flat quarter-over-quarter.

Non-GAAP gross profit was $16.3 million in both the first quarter and Q4 2011. As a percentage of revenue, non-GAAP gross profit was 41% of revenues for the first quarter of 2012, compared to 38% of revenues for the fourth quarter of 2011.

In the current quarter, non-GAAP gross profit was positively impacted by favorable product mix associated with increased contribution from our high voltage and microelectronics products. In addition, in the fourth quarter of 2011 we recorded a loss on the sale of 14 single board computers with our microelectronics product line, which negatively impacted our gross profit rate.

We expect gross profit to decline in Q2 2012 to approximately 39%, due to product mix, and then return to target levels of 40% or above for the remainder of the year. Total non-GAAP operating expenses for Q1 2012 were in line with the prior sequential quarter, totaling $13.7 million for Q1 2012 compared with $13.8 million for Q4 of 2011.

We expect non-GAAP operating expenses to grow by a range of $800,000 to $1 million in Q2 2012 and to further increase in Q3 and Q4 to a run rate of approximately $16 million in support of our forecasted revenue increase in the latter half of the year.

Non-GAAP net income was $1.8 million, or $0.07 per diluted share, for the first quarter, compared with non-GAAP net income of $1.9 million, or $0.07 per diluted share, for the fourth quarter of 2011. Non-GAAP net income excludes stock based compensation expense and amortization of intangible assets.

Our earnings before interest expense, taxes, depreciation, and amortization, or EBITDA, was $4.4 million in Q1 compared to $5 million in Q4.

Now I’d like to turn to the balance sheet. We ended the quarter with cash of $30.6 million, which represents an increase in cash of $1.3 million from Q4 2011. The significant components of our cash activity for the quarter include $10.3 million raised under our shelf registration statement, $5 million in net borrowings, $5.5 million in settlement payments made to the SEC and DOJ, capital spending of $4.1 million, and a combined increase in accounts receivable and inventories of $9.8 million.

The increase in accounts receivable was primarily due to an increase in days sales outstanding and the increase in inventory that’s associated with anticipated future product demand. In addition, accounts receivable include the $2.9 million insurance receivable from our D&O insurance carrier at the end of Q4 2011 and Q1 2012, related to the derivative lawsuit which was paid to the plaintiff’s attorneys in the second quarter and will not be included in accounts receivable at the end of Q2 2012. We have one remaining payment to the DOJ of $2.25 million related to the FCPA matter, which is fully accrued and will be paid in the first quarter of 2013.

During the quarter, we generated $10.3 million in net proceeds from the sale of approximately 573,000 shares of Maxwell’s common stock, at an average price of $18.60. As previously announced, we had entered into an at the market equity offering sales agreement with Citadel Securities LLC in February 2012, under which we may offer and sell up to $30 million in shares of our common stock. We expect to continue to opportunistically sell shares under this program in future quarters.

In addition, during the quarter we drew down $5 million from our credit facility to fund recent capital expenditures as we continue to focus on expanding our production capacity.

Now I’d like to provide an update regarding the shareholder derivative suit. As we had previously disclosed, a proposed settlement was reached in December 2011 for a total settlement value of $3 million, with $2.7 million to be paid by our insurance carrier and $290,000 to be paid by the company. I’m happy to report that this settlement received final court approval in April 2012. We are pleased that the suit has reached final settlement, and we can now put this matter behind us.

We also put a few other legal matters behind us during the quarter. In February, we entered into a definitive settlement agreement related to a customer dispute for a total settlement amount of approximately $2.4 million, of which we paid $667,000 in cash during the quarter, and the remainder will be satisfied as a discount on future purchases of our product.

Related to this customer dispute, we were able to recover approximately $667,000 through a settlement reached with the contract manufacturer of the products. In addition, a government agency who is reviewing our actions concerning the past microelectronics product failure informed us that they had closed their files with no action to be taken against the company.

And lastly, we also reached an agreement in principle related to an intellectual property matter during the quarter and the closure of all these legal matters will enable the company to significantly reduce external legal expenses moving forward.

Now I’ll turn it back over to David to discuss other areas of the business.

David Schramm

Very good Kevin. Thank you. Having already covered the ultracapacitors, let’s turn our attention to Maxwell’s other products. Our Swiss subsidiary develops and markets high voltage capacitor products that are used in the electric utility grid and other applications involving the transmission and measurement of high voltage electrical energy. [audio drops out for 2 seconds]… global prime contractors that build power plants and install electric utility infrastructure around the world.

Maxwell is the world’s leading supplier of high voltage capacitors for the grid, and our sales are driven by global spending on electric utility infrastructure. Developing countries such as China and the other BRIC countries are major consumers of our products.

Last year, we won a major contract to supply capacitive divider products for the multi-billion dollar renovation and modernization of Russia’s utility grid and we are in the process of delivering a new product that functions reliably in minus 60 degrees Celsius temperature conditions in Siberia.

We are also monitoring developments and opportunities for the so-called Smart Grid here in the U.S. and elsewhere to determine where and how our products fit.

Sales of our microelectronics products, mainly the radiation-mitigated components on single board computers that we supply to satellite and spacecraft OEMs in the U.S. and Europe, were higher than usual in Q1, but don’t vary a lot on an annual basis. Space programs typically span several years, and our deliveries are tied to program schedules and funding cycles, so volumes do vary quarter to quarter.

Last fall, C-MAC MicroTechnology, a leading European supplier of radiation-hardened space-qualified components, and our U.K. based microelectronics unit announced a collaborative initiative to supply Maxwell-designed memory devices to the global space market, which should help to generate future sales growth. The space market’s requirement for failure-free performance allows these microelectronic products to command high profit margins that contribute strongly to our bottom line.

Ultracapacitor sales accounted for about 56% of total sales in the first quarter. As we reported earlier, we have doubled ultracapacitor production capacity over the past couple of years, and we are moving ahead with additional investments in capacity expansion, and research and development and other resources to support further growth.

Last year, we moved into a new, expanded technology center here in San Diego and we are in the process of outfitting a 123,000 square foot electro production facility in the Phoenix, Arizona area. When we bring it online, it will double electro production capacity and provide growth space for our other engineering and manufacturing activities as we go forward.

As we stated in our press release, we expect sales in the second quarter to increase by 4% to 7% sequentially compared with the just-reported first quarter. For the full year, based on reduced forecasts from customers in Europe and elsewhere, we now expect sales to grow by 15% to 20% over 2011.

That should enable us to continue to generate cash from operations and to be profitable on a non-GAAP basis. We continue to grow and expand our market penetration, even in this very difficult global economic environment.

With that, I’d like to entertain your questions.

Question-and-Answer Session

Operator

[Operator instructions.] Our final question will come from Philip Shen with Roth Capital Partners. Please go ahead.

Philip Shen - Roth Capital

I’d like to start off by exploring your revised outlook. Can you give us some more color regarding the rationale? I know in your prepared remarks you touched upon some weakness in Europe. Is this related to Continental? Does it reflect lower demand for stop-start systems?

David Schramm

Let’s take it in a couple spots. The customers we deal with are really once removed from us. And if I take a look, for instance, at hybrid buses, hybrid buses typically get funded by the government. France and Spain were big buyers of these hybrid buses from one of our customers. That customer then bought hybrid systems from an integrator to whom we sold ultracapacitors. So when France and Spain basically don’t have the government funding for the bus programs, it trickles down to us.

When I look at the automobile, it’s exactly the same scenario. I was there a week ago and basically car sales are down in Europe, and they’re down double digit percentage. So when the car sales are down, they don’t need start-stop systems and they don’t buy the ultracapacitors to meet it.

Now, that said, I think this is a timing issue, that when this recovery in the world finally kicks into play, there should be pent up demand that we’ll address.

Philip Shen - Roth Capital

Okay. And then you also talked about weakness elsewhere beyond Europe. Can you give us some color there. Which end markets specifically? And perhaps which regions as well?

David Schramm

I think to answer that question, it’s global. A lot of what we sell to is tied to government problems, or government programs, I should say, not problems. But when you look at renewable energies, and you look at mass transportation, they tend to have government subsidies and regulations tied to them. And as governments back off on funding, we get that trickle down. Like I said, it’s two or three behind, because it’s the customer that’s buying the product. It’s the integrator that’s making the product, and it’s us that sells them the ultracapacitors. But again, I think we’ve got to reiterate that this is a timing issue. The programs didn’t go away. The programs we’re working on for development, for new programs, they’re still in front of us. The timing is just getting moved. And that’s really the basis for us moving our forecast.

Philip Shen - Roth Capital

And transitioning maybe away from the government sponsored programs that might support you guys, and transitioning more to market-driven demand, on the last conference call you talked about UPS sales could be about $10 million in 2012, and then the strong and well-growing SSD market could and would likely be higher. What are your latest expectations for these end markets?

David Schramm

We see those getting pushed out a little bit also. It’s a timing issue.

Operator

We’ll move next to Zach Larkin, from Stephens. Please go ahead.

Chris Godby - Stephens, Inc.

This is Chris Godby in for Zach Larkin. Thanks for taking my call. So the first question that I have for you guys, in your outlook you state that to be profitable on a non-GAAP basis - and I believe a similar question was asked last quarter - is there any reason to believe that you wouldn’t be profitable on a GAAP EPS basis?

Kevin Royal

No, if we achieve the guidance that we put forth, we’ll be profitable not only a non-GAAP basis, but a GAAP basis as well.

Chris Godby - Stephens, Inc.

And then in particular, in wind, in China, you state that you continue to expect it to return to more normal levels in upcoming quarters. Are there any recent data points that you might be able to hit on to give you that confidence, or any additional color you could give us there?

David Schramm

Well, last year, you know, we hired a consultant to really take this watch apart, and their analysis came in that it’s going to be the second half, and as we talk to the customers and I can tell you right now we’ve got a sales effort going on with the wind market, they’re starting to see a little bit of daylight. So we still have some confidence that the second half is going to be an uptick for wind for us, around the world.

Chris Godby - Stephens, Inc.

And then one last question. Pertaining to the bus results, and demand in China. Can you give us some color on the unit volumes that you’re expecting during the year there, and any traction that you might be seeing in non-China geographies?

David Schramm

The transit bus, most of our activity obviously is in China. As I stated earlier, there’s about 5,000 buses in the world now using Maxwell ultracapacitors for the hybridization. And we also have the growth plans coming out of Europe. And as I stated, Europe has been a little more impacted now because buses typically are bought by transit authorities, and they get their money from the government. So the Chinese still have got their mandate of 25 cities with 1,000 buses, and they’re working through that. So it still looks like the bus is still going to be a very large segment for us as we continue through 2012.

Operator

Our next question comes from Michael Lew with Needham. Please go ahead.

Michael Lew - Needham

With regard to the outlook ranges you provided for Q2 in the year, what’s the delta between, let’s say, the 4% to 7% and 15% to 20%? Like, which end market recovery could enable you to meet the high end of the ranges?

David Schramm

Obviously we’re going to shoot to surpass those. That’s always the plan. But as you know, the markets we deal in are rather unpredictable. I would dare say that the pent up automotive demand in Europe as we get through this lull period, where they’re down, it’s got to come back. Does that come back in 2012? You know, it’s a little early to tell.

The wind, as I just stated to the last caller, to Chris, we think that’s going to come back in the second half. The bus, we think that’s going to continue on moving. So we readjusted based on timing of programs, not as much that there’s anything that’s going away.

Michael Lew - Needham

And how much was hybrid bus up year on year and quarter to quarter?

Kevin Royal

We don’t typically provide that information on a quarterly basis.

Michael Lew - Needham

But year on year could you comment on how much, let’s say, China was up relative to Europe?

David Schramm

We’ve got that broken out in the 10-K, Michael. China is the biggest geographical part. I want to say in the 10-K 27% was China, 26% was Germany, 20% U.S., and the balance was the rest of the world.

Michael Lew - Needham

For hybrid bus?

David Schramm

No, for sales total. We don’t break it out by product grouping.

Michael Lew - Needham

And also, in light of the current demand setting you’ve commented on, can you comment on the buildout plans for the new electro facility? Are you still on track for the initial plans you stated before? Or are you going to basically curtail that a little bit?

David Schramm

Obviously as we curtail the year over year forecast, and again, we’re curtailing the forecast, but we’re still saying this company’s going to grow 15% to 20%. And in this global economy, we’re still thinking that’s a pretty ambitious plan. But we see the market there. That’s going to drive the need for when we pull the switch, if you will, on starting up the Phoenix operation. But we’re looking to the end of this year, the first of next year. And it’s going to be a matter of when we have to have the production.

Michael Lew - Needham

And then finally, the state council in China recently discussed plans to force the technology development for EV adoption. Could you provide some insight into their initiatives? Have you started to see any of the benefits from that? I do realize it was pretty recent. But didn’t know if you had any additional insight into that.

David Schramm

No, we have not. Our focus has been on the hybrid vehicles. My sense is that market is significantly larger than anything we’re ever going to see in EVs in the next 10 years. So our focus is going to maintain on hybridization.

Operator

We’ll take our next question from Ahmar Zaman from Piper Jaffray. Please go ahead.

Ahmar Zaman - Piper Jaffray

I guess if I could explore the outlook a little bit more. I guess I’m surprised with the impact of hybrid buses in Spain being as big as it seems. My understanding was that the majority of your bus end market was largely in China. Can you give us some more insight into how big the contribution from the European bus market has been historically to your hybrid bus business?

David Schramm

Ahmar, I tried to use that as an example that when you take a look at what’s happened in Europe, when the governments don’t have funds, they don’t give it to transit authorities, and again the [unintelligible] effect to us. China seems to be rather stable. That has been steady production, if you will, of the hybrid buses. But China’s not the only market we participate in. We’re in a global market. So the European impact is being felt right now.

Ahmar Zaman - Piper Jaffray

And so you’re saying the China buses are moving along as predicted, as you had anticipated?

David Schramm

Yeah, it’s a steady business for us at this point, but again, that’s driven by the government initiative that we’ve been talking about the last two years, that the government has said they want 25 cities each to have a thousand buses. And they’re behind schedule on that.

Ahmar Zaman - Piper Jaffray

And then I think you just mentioned that UPS sales and solid state drives have pushed out. Can you provide some more color on that? Was there any particular customer that you were dealing with that was at issue here? Or was it a larger industry issue?

David Schramm

I think it’s an industry issue at this point. As people don’t put infrastructure in, they don’t need backup systems. So again, it’s going to be a timing issue. I fully expect that that’s going to recover, and when it does we’ll have those systems in place.

Ahmar Zaman - Piper Jaffray

And there was a comment made about opex. I apologize if I missed that. But Kevin, did you say that you expect opex to be at a $16 million run rate in the second half of the year?

Kevin Royal

Yeah, for both Q3 and Q4. And then a comment related to the second quarter of 2012 is that we would expect operating expenses to tick up from the Q1 level. And this is non-GAAP. But to tick up anywhere from $800,000 to $1 million quarter to quarter.

Ahmar Zaman - Piper Jaffray

Should we anticipate that the $16 million run rate in the second half to be sort of a normal run rate going forward? I’m just trying to reconcile with some of your previous comments about $14 million to $15 million quarterly run rate.

Kevin Royal

Sure. So the $16 million, a big portion of that would be associated with revenue increase, so hiring, sales commission, other variable costs associated with an increase in revenue. The same would be true of 2013, as we move forward and as we grow, operating expenses would grow. We would look to control our opex increases and have those increase at a rate that would be slower than our increase in our revenue growth.

Ahmar Zaman - Piper Jaffray

Just going back really quick, you guided the first quarter to be down 5% quarter-over-quarter. It seems like you’re coming in close to 8% quarter-over-quarter decline. As you went through the March quarter, was this a negative surprise closer to the back end of the quarter, or was the weakness sort of felt throughout the quarter?

Kevin Royal

It definitely hit us toward the end of the quarter.

Ahmar Zaman - Piper Jaffray

Okay, so it was a surprise to you then?

Kevin Royal

Yes, that would be correct.

Operator

We’ll take our next question from Ben Callow with Robert W. Baird. Please go ahead.

Ben Callow - Robert W. Baird

Could you remind me on the capex spend for the Phoenix plant? And then do you need to draw down the ATM to fund that? And if so, should I think about that $18.60, $19 range as a range where you guys are sellers? And that’s my first question.

Kevin Royal

Okay, I guess there was a number of questions there. But related to capital spending in Phoenix, our estimate is that to bring that facility up and put it online will be in the range of about $10-13 million, just for Phoenix alone. Our overall capital spending plan is $23 million so that range that I gave you would be included in the overall capital spending.

And then I think your other question, or at least the second half of that question, related to the ATM program. And there’s no price level that we would give. I think we’ve always been very consistent to say that we intend to be opportunistic. And by that, we mean that it’s always been our goal, of any equity transaction, to minimize the dilution to existing shareholders.

Ben Callow - Robert W. Baird

And can you discontinue that? Or is it a binding agreement?

Kevin Royal

It’s not a binding agreement. We basically announced up to $30 million in sales, but we’re in no way committed to selling stock that would yield those proceeds.

Ben Callow - Robert W. Baird

And then as I look at the new guidance, are you guys forecasting a rebound in wind? Because I’ve heard that a couple times, that in the back half you expect wind to firm up. Is that part of getting to that 20% range? Or does that get me to the 15%? Or how do I think about that? Do I need to have firming up of wind to get into your range there?

David Schramm

Well, the firming up of wind, again, Ben, is what we found from talking to customers and talking to governments, and to the consulting firm that we hired last year. And again, the consistent message is it’s the second half of the year. So as that picks up, I think we’re going to see that being part of that 15% or 20% for the year.

Ben Callow - Robert W. Baird

And then on the other two business units, I don’t think we’ve touched on it a lot in questions and answers. I know that microelectronics is a lumpy business. It was a great quarter here. How much visibility do you have over the next three quarters going into that outlook in the microelectronics and then in the capacitor side of the bus. How much visibility do you have there to get you to that 15% to 20% growth?

David Schramm

Both of those are a lot more predictable, because they’re more mature businesses. Obviously the microelectronic is tied to satellite programs, and you’re right, it’s a lumpy bus. On an annual basis we’re pretty comfortable with what we see, but you know, it’s a single-digit growth business at best. The high tension business, that tends to be tied to power plants, which tend to have long horizons for planning. So we get pretty good visibility out of that. We’ve got a pretty good look into how many power plants they’re going to put into place the rest of this year, and all into 2013. And you know, the ultracapacitor, because it’s a new business, we just don’t enjoy that same visibility.

Ben Callow - Robert W. Baird

Okay, my final one for Kevin. We talked about this before. If you build out the facility and it’s underutilized, it’s not that big of a capex spend, where it’s going to be a very material drag on margin. Is that correct?

Kevin Royal

That is correct. That equipment, most of that would be depreciated over seven years. A lot of the equipment that we have here today in San Diego will be reaching full depreciation schedule, so if we were to be below 100% utilization, you wouldn’t see a big drag on the gross profit as a result.

Operator

We’ll take our next question from Colin Rusch with Thinkequity. Please go ahead.

Colin Rusch - Thinkequity

Can you just give us a better sense of the composition of both the receivables and the inventories? Let us know if you’ve changed your terms with anyone in China on those receivables.

Kevin Royal

I guess it would be related to the question on China receivables. It would depend on, you know, changed our terms, in relation to what period. But typically what we do in China is we require either payment in advance or a letter of credit. There are customers that have shown that they pay on time and pay consistently, that we do grant terms. And so with respect to customers that receive terms that’s been fairly consistent over the last couple of quarters.

With respect to the increase in receivables, some of that is related to linearity. We also have a $2.7 million receivable recorded related to the derivative lawsuit. That’s a receivable from the insurance company, and that was paid in the second quarter. So that will not show up in the receivables.

And then related to inventory, certainly we built some product that we weren’t able to ship, that it would be our intention to ship in the second quarter, and therefore inventory should come down in Q2 versus Q1.

Colin Rusch - Thinkequity

And then can you give us a better sense of ultracapacitor margins? You’ve had a pretty healthy investment in R&D and product development. And we know you’ve done a great job with producing some better margins on those ultracapacitors, but can you break that out for us in terms of the trajectory, into what happened in the first quarter and what you see happening throughout the balance of the year?

Kevin Royal

We don’t break out gross profit separately, but to the extent that you have seen improvements in our gross profit over the last four or five quarters, which has certainly taken place, the increases can certainly be attributed to the improvement in the ultracapacitor product group. Because what’s happened is the gross profit has been relatively steady related to microelectronics and high voltage, and then the lower gross profit products, being ultracapacitors, have become the more significant portion of the overall revenues. And so as that has happened, and as the gross profit margins have improved, that signals that we are lowering the cost and improving the overall gross profit structure for ultracapacitors and we expect that to be a steady improvement throughout 2012.

Operator

We’ll take our next question from Craig Irwin with Wedbush Securities. Please go ahead.

Craig Irwin - Wedbush Securities

Most of my questions have been asked, but during your remarks, Kevin, you gave multiple details on legal items that you’ve been successful closing out. Can you update us on roughly what your legal expenses were in the quarter? Whether or not you’ve been able to bring these down? And whether or not they should continue to go down the rest of the year given the items that you’ve closed down? And then could you also clarify for us whether or not the $667,000 payment from [EPCOS] was actually booked in the first quarter, and whether or not that subsidized the SG&A line? And whether or not the $290,000 payment for your shareholder litigation settlement will also hit the SG&A line in the second quarter?

Kevin Royal

Let me take the last half of that question first. The $290,000 that was an expense to the company was actually accrued in the fourth quarter. And so that impacted the G&A, or SG&A, financial statement line item in Q4. The $667,000 was actually a credit to expense in the first quarter, and so as you say it did subsidize the SG&A spending in the first quarter. It was basically an offset to spending.

Taking a look at our legal spending, we were actually down from Q4. Q4 2011 was $1.1 million. In the first quarter we spent approximately $900,000 on legal spending as we wrapped up these matters. And we will go to what would be a normal run rate, which we don’t know for sure. But what we are forecasting for legal spending moving forward is about $350,000 on a run rate basis. So if there’s a situation where we don’t have as many kind of corporate general legal matters, compliance type issues, then we could be below that. But that’s what we’ve got in the forecast for the remainder of the year.

Craig Irwin - Wedbush Securities

Then just if I could take a stab at this - I know multiple people have asked this question - but can you talk proportionately about which markets made the biggest contribution to actual results versus your guidance, the negative delta, as we closed out the quarter, and whether or not those specific projects, those specific markets, look like they were simply pushed into Q2, and there’s a catch up, or whether the level of business activity is substantially lower, which is obviously supported by your guidance?

David Schramm

I would hope that we get some visibility to this, but there isn’t one that stands out. What we saw was a little bit of softness in the bus that I’ve already talked about. The softness in the automobile, because auto sales are down. The softness in UPS, because the infrastructure’s not going into place. So it’s a question of, as I said earlier, it’s a timing issue. These programs didn’t go away. The new development work that we’re working on for brand new programs just has been moved out, and frankly what we’re starting to see is softness in the global economy.

We’ve been very fortunate. You know, we grew through 2008, but I think it’s because we are entering all these new markets at such a low rate. Now that 56% of our revenue is ultracapacitor, these little jilts end up impacting the company a lot more than they used to. But 20% growth for the year is, in today’s market, we’re still thinking that’s a good kind of number to have, if you will.

Craig Irwin - Wedbush Securities

No, I definitely agree. That’s a great number. Last question, if I may, if I can squeeze one in here. Your Arizona facility, obviously you wouldn’t be spending money on capital on putting up a new plant unless you thought you were facing a very high probability of demand to fill it. It’s an interesting geographic choice. I understand the ease of travel back and forth to San Diego, but it also overlaps quite nicely with a number of the automotive OEMs, their own development assets down there. Can you indicate, maybe, where you are in discussions for probable customers that would be a material contribution to business out of that plant, and whether or not you would see that that plant would have a good level of utilization in ’13 once it’s up at a regular run rate?

David Schramm

Yeah, that’s a good question. You know, the whole purpose of putting it in Phoenix, as you said, was to keep it close enough that the talent base that we’ve got in San Diego can support it and they don’t have to replicate it. You know, there’s 20 flights a day between San Diego and Phoenix, which makes it very convenient for our PhDs to get over there.

The cost of utilities is significantly less in Arizona than it is in California, so there’s some cost benefits we’re going to see. Recruiting engineers. It gives us a different geographical base to pull from. You know, there’s an awful lot of university and technical people between Tucson and Phoenix, so that opens the door to have us expand our engineering base.

And then relative to what we do in the U.S., we have customers that do require made in the U.S.A. So this gives us some more floor space, if you will, to put those programs into place. I think you’re all aware that we opened an office in Detroit, and Continental’s got an office in Detroit, and we are actively working with the Detroit automakers on incorporating ultracapacitors into their voltage stabilization start-stop systems.

So we’re really looking forward to getting Phoenix started up, and then to fill the plant up and to move on from there.

Operator

We’ll take our next question from Jed Dorsheimer with Canaccord. Please go ahead.

Jed Dorsheimer - Canaccord

Competition, was wondering if you could just comment on it. You were clearly there early entering into this space. Really with a duopoly between you and NESSCAP. I’m just curious if the sole sourcing where it was 90-10 has come down to sort of 70-30, and if that’s contributing here in terms of the slowing, if you will.

David Schramm

Let me take that in a couple ways. We announced last year that we had $97 million of revenue in ultracapacitors, and NESSCAP just announced they were under $18 million. LS Cable we think is another very formidable competitor. They’ve got a lot of financial backing. [Bascap] in France. And again, it’s hard to get numbers from these other companies, because they’re either part of a private company as in the case of [Bascap], or they’re part of a big conglomerate, as the case of LS Mtron. But we still believe that we’re leading the marketplace.

But if you look at the size of the market, we are seeing some growth opportunities. We saw a couple other people announce that they’ve got start-stop systems using ultracapacitors. And again, we look at that as a real plus. At least it validates the technology as we go forward.

But as I said in my opening remarks, there really isn’t a lot of competition that we’re seeing in the marketplace today that can help us open up new markets. As I look at the markets that we’re in today, we were the forerunners. We put the engineers out there. We put the marketing folks out there. And we’ve opened the markets. So we need some help from the competitors to open new markets for us.

Jed Dorsheimer - Canaccord

What’s a normal level for wind? I think you had commented that you see it going to a more normal level. What is normal for that on a quarterly or annual basis? Either one is fine.

Kevin Royal

On a quarterly basis, a normal run rate that we experienced for the first half of 2011 was in the $7-8 million range.

Jed Dorsheimer - Canaccord

And so you would see that as sort of a normal level going forward?

Kevin Royal

When the wind market resurges, we would expect to reach those types of levels on a quarterly basis, yes.

Jed Dorsheimer - Canaccord

And you’re expecting that in the back half of this year?

Kevin Royal

That is correct.

Jed Dorsheimer - Canaccord

Okay. That’s a pretty massive increase there, like three times or so.

Kevin Royal

It would be, from current levels, yes. But those are the levels that we’re seeing when we survey customers and prepare our forecasts.

Jed Dorsheimer - Canaccord

Okay. And so if we look at your guidance for the full year, that seems to make up the vast majority, right, is a resurgence in the wind market is really sort of the growth that you’re looking at this year, correct?

Kevin Royal

I mean, it will certainly help. But we’re looking for other end markets to contribute as well.

Jed Dorsheimer - Canaccord

Okay. The consultant, have you mentioned who the consulting firm is that did this analysis? And the only reason that I ask is that it seems as if there’s a lot of weight that’s being placed on this analysis.

David Schramm

All we can tell you is they’ve asked us not to announce who it is. But it is a major consultant.

Jed Dorsheimer - Canaccord

And then Kevin, could you help me with a previous question that was asked in terms of Arizona coming up to speed, and if it’s underutilized. Or maybe could you quantify the impact in terms of gross margin? Because I would imagine that there’s less products to spread the cost. Or maybe you could just help me there in terms of if it goes from 100% to 70%, what that impact would be in terms of a drag on gross margins.

Kevin Royal

Yeah, so because of the long term nature of that capital, the long lived nature of it, and the facility itself having a very long lease, a 2.5 year lease, the depreciation, the cost of the equipment, the fixed cost, get spreads over a relatively long period of time. So let’s say that is only half utilized. It shouldn’t really have a very significant impact at all on the gross profit as we move forward.

Jed Dorsheimer - Canaccord

Could you just help explain why that wouldn’t? I would think that would be an obvious impact. You would have less products to attribute the cost to, so if you go to 50% utilization, how would that not have an impact in terms of your costs? That’s what I’m just not understanding.

Kevin Royal

Well, this is the throughput on the electro lines in Phoenix, and as I mentioned earlier, on a different question, a lot of the capital here in Balboa will be coming to the end of its depreciable life. And so basically the two would offset. Even at a lower utilization rate, the impact to gross margins, while there may be an impact, it would be fairly light.

Jed Dorsheimer - Canaccord

Gotcha. So it’s having an impact, it’s just that you’re trading it off. The benefit you would have seen, or that you would see in terms of manufacturing on fully depreciated equipment would not be realized because you would be dealing with that, sort of trading it off with Arizona, right?

Kevin Royal

That’s correct.

David Schramm

I think we’ve got time for one more question.

Operator

Thank you. Our last question will come from Jeremy Hellman with Divine Capital Partners. Please go ahead.

Jeremy Hellman - Divine Capital Partners

Wanted to ask about Japan, from a couple different perspectives. First off, with regard to AMI, are there any of the major AMI vendors that you are not working with?

David Schramm

Well, we’re talking to a lot of people over the world on AMI, obviously just because of the smart [unintelligible] implications. But I think the last announcement we had in Japan was ShinMaywa, which was the electric garbage truck, that are using ultracapacitors to store energy and reuse it.

Jeremy Hellman - Divine Capital Partners

Right, but I was thinking more from the perspective of Pepco, which is looking to deploy something on the scale of 19 million smart meters over the next 10 years or so, with the first $3 million charge going out RFP this fall. I’m looking at it from the perspective of whichever meter manufacturer, whether it be Itron, Hitachi, Aclara, whoever. Are there any of those vendors that you wouldn’t be pulled into that opportunity by? Essentially, are you the arms dealer to everybody in the battle?

David Schramm

Jeremy, we’re not going to turn down anybody. We look at smart grid from two vantage points. One, can we put ultracapacitors into the meters and help with that? Can we also combine our ultracapacitor technology with our high tension capacity, and work with the grid itself. So those are huge opportunities that we are looking at with every manufacturer at this point.

Jeremy Hellman - Divine Capital Partners

Okay, and that anticipated my second question that I was going to ask you, where you thought there might be significant opportunities on the high voltage side. So broadly, over the midterm look, do you expect Japan to be a much more robust piece of the puzzle for you guys given these opportunities?

David Schramm

No, I really don’t. You know, our focus has been Europe and China, and Japan’s got some different issues that we’ve got to deal with. But frankly, we’ve got a foothold in there but it’s not a major market for us at this time.

All right. Thank you everybody. We appreciate your attention and we’ll talk to you next quarter.

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